Nick Kirwan: A once-in-a-lifetime opportunity to get LTC right

Next month will see long-term care back on the political agenda as the Care Bill returns to Parliament and International Longevity Centre head of care funding advice network Nick Kirwan says the country cannot afford to miss this chance to get the system right.

“It is a once-in-a-lifetime opportunity to make the system as good as it could be,” says Kirwan.

Reform of the UK’s system of long-term care is long overdue and although there was some small reform to the way care is paid for back in 2001/02 following a Royal Review, successive governments have been reluctant to embark on meaningful change to the haphazard way that long-term care is provided.

Kirwan says the complexity of reform is the main reason for the lack of progress and the current Government deserves credit for being brave enough to tackle to issue.

“We have had the Royal Commission, we looked at this again and again and again and every time people have said, this is really hard, once you have got the bonnet up.”

The case for reform has now become too strong to resist when the scale of the problem is laid out in black and white.

By 2040, the Office of National Statistics has predicted the number of over-75s in the UK will double from five to 10 million while last year’s Dilnot Report says three in four people will need care in old age and that is only because 25 per cent die at a younger age.

Long-term care faces some of the same demographic issues as the pensions system, with increasing longevity and an increasing proportion of the population in retirement combining to increase the need. But care faces the additional challenge from the fact that life expectancy is continuing to increase faster than healthy life expectancy, so the average length of time that people will need care is increasing at the same time as the number of people who need care is also increasing.

As it is so difficult to get political support for long-term care reform, Kirwan says it is important to ensure this set of reforms is lasting. But while Kirwan says the ILC is strongly supportive of the reforms on the whole, it does have several concerns about the bill in its current form.

These concerns cover the haphazard and inconsistent way that people are currently introduced to the care system, problems with the means test for calculating when people will start to receive financial help with the cost of care, transparency of the cost of care for individuals and the need to ensure people get the advice and information they need when they need it.

One of the main concerns is trying to establish a consistent way for people to enter the care system. Kirwan gives the example of the NHS, where, regardless of what type of level of medical help they need, people know that their first point of contact should be their GP. For the care system, in comparison, people are currently funnelled into the system from a number of different sources including, charities, local authorities and hospitals.

Kirwan refers to this process as “the drunken walk” as people lurch from one organisation to another until they arrive at their destination more by luck than anything else.

“This new Bill coming through there is the opportunity to create a single entry point to the system and that is through your local authority. It is a bit like accessing the healthcaresystem. Everyone knows that if you want to access the healthcare system, you go and see your GP and from there on you have your hand held through the system.”

Kirwan says this should be easily achieved as, under the current reforms, people will be strongly incentivised the contact their local authority as soon as they are aware they need care in order to get the meter running on the cost of their care and make sure every penny spent is counted towards the individual cap on care costs of £72,000.

Targeting people at the point they are being assessed for care will also help meet the ILC’s main aim of ensuring that everyone gets the level of advice and information they need to make their decisions.

Kirwan and the ILC are stopping short of demanding that everyone entering care gets regulated financial advice as large numbers of people will have all their care costs met by local or central government and their advice needs will only extend to ensuring they are receiving their correct benefit payments.

“For most people, financial advice means help with arranging their welfare benefits and you don’t need to see a regulated financial adviser for that, there are plenty of agencies such as Age UK that can help you with that. Obviously we want those free services to be as good as they can be and available to everyone.”

But Kirwan says one of the ILC’s main aims this autumn is to help ensure the people who will be paying part or all of their care costs get the advice they need and for most this will be full, regulated financial advice.

“There are a specific group of people who are care self-funders and who get no help from their local authority at all initially and those people need a very strong nudge to get regulated financial advice. On average they will be paying something like £30,000 to £35,000 a year and they will find that for four years. To do this without any advice seems to me to be something we need to put right.

“At the moment, only 7 per cent of those self-funders get regulated financial advice and that is something I would like to see changed. It should be more like 70 per cent or more.”

For Kirwan, the solution is relatively straightforward and would involve local authorities ensuring that self-funders are pushed in the right direction when they first get in touch to get the meter running on their care costs.

“The local authority will have to assess first: do you need care? Then if you do, do you need financial support? If the answer is no, you don’t it means you will have to pay for the cost of care yourself and that is where I would like local authorities to say it is a really good idea to go and see a regulated financial adviser.”

One sticking point is the historical reluctance for the public sector to team up with the private sector for referrals but he says this could be relatively straightforward to sort out.

“If you see a financial adviser post-RDR, most will give you an initial period they will not charge for to see if there is mutual ground for the service. If we formalised that, it would make it really easy for the local authority to say, why don’t you see a regulated financial adviser. You are entitled to half an hour. Most of the time they will be impressed and will want to engage with the adviser.”

The way the care bill has been structured means that anyone with assets worth less than £23,500 will have all their care costs met while those with assets (including their home) of between £23,500 and £118,000 will receive some help towards their care costs. The maximum that anyone will have to pay towards their care costs will be £72,000.

Although this tiered approach does give people some certainty over what they will pay for care (hotel costs, such as accommodation and food are excluded from the cap), Kirwan says it does provide a strong incentive for people near the thresholds to run down their assets in advance of needing care. And, he says, it also has an impact on how different sectors of the population will approach paying for care.

Depending on what level of income and assets people have in retirement will mean fundamentally different approaches.

The very wealthy will be able to pay for their care costs without too much trouble while those with no housing assets and low levels of income will be entitled to financial support as soon as they need long-term care.

However, those with income or assets that fall above the means-tested thresholds will face some awkward decisions. These options include taking out long-term care insurance, conventional annuities, immediate needs annuities, commercial equity release or deferring care fees – which is effectively using equity release through the local authority.

“I do have some concerns. People do not understand that hotel costs are not included and top-up costs are not included.

“If you look at the means test for care, it creates a disincentive to hold on to assets and savings for people who are just about the means test level.”

Kirwan says any consideration of equity release raises the need of regulated advice again and he says the potential market for commercial long-term care insurance is not large.

“The potential for pension and insurance products is quite a narrow range. It is well above the median. You have to have enough income to be able to pay for the product but not so much that you can’t pay for your needs out of ordinary income.”

But at least this section of the market has some savings option. Those towards the lower end of the income and asset spectrum have far fewer options to help them pay for their care costs and that is why the ILC has been working on the development of personal social care bonds to help people save towards the costs of their own care needs.

Kirwan explains that these could be set up along the lines of premium bonds and run by an organisation such as NS&I. Similar to premium bonds, savers would benefit from each £1 invested being entered into a monthly prize draw while any deposits would also attract interest. The savings would be exempt from the long-term care means test but in order for the Government to agree to this any funds would have to be used to pay for care related services.

“They would only work if they were exempt from the means test. To make it worthwhile for the Government to exempt them from the means test, it is really important for people to be able to use that money either for prevention services, to enable them to stay in their own homes for longer and for top-up services. The appeal would be they would also pay prize money as well as pay interest. We have done some work with NS&I and we think there are quite a few parallels.

“If it wasn’t needed for care, that money would go into their estate to pay the funeral costs or be passed on, so it wouldn’t be lost.”

Kirwan says there are two further issues that need to be addressed in the package of care reforms.

One is a technical problem with how the means test is currently structured.

The Government has said that people with assets of less than £118,000 will start to receive financial assistance with their care costs, but as part of this calculation the bill says it considers people to receive £1 of income per week for every £250 of assets they have. This phantom income means the level of people’s assets will not match a local authority’s assessment of their assets.

“If you have more than the lower capital limit, you are deemed to have £1 a week in income for every £250 of capital you have. Of course, you can’t invest £250 and get £1 of income a week. That is £50 a year– I don’t know of may investment that would give you 20 per cent. The average cost for a local authority for care for a year is around £25,000, which is what counts towards the capital means test. If you look at that ratio of £1 of income to £250 of capital, it means you probably only start to get means-tested support when you have spent down your assets to £90,000, perhaps a bit less. So people will get down to £118,000 and will expect financial support to kick in and it won’t unless the numbers are changed.”

Transparency over the cost of buying care for self-funders could also cause problems.

As local authorities are able to use their bulk buying power to keep the cost of providing care down, care providers generally charge self-funders considerably more for the same level of service. It is the cost to local authorities that will be used to calculate people’s payments under the care cap and as local authorities will be providing annual statements about the costs of care, self-funders will see exactly how much more care is costing them.

“They are pretty quickly going to find out when they go to the care home that they cannot buy it for that cost.”

But despite these potential flaws, Kirwan says the long overdue changes to the care system could create a virtuous circle which will benefit people using the system, should save local authorities money and could provide a significant opportunity for financial advisers.

“The most important thing is to get people the right information and advice, including financial advice. If we can get this right, if we can get the 7 per cent up to 70 per cent, there is a fantastic opportunity for financial advisers and consumers are screaming out for this help.”

Personal Care Savings Bonds

The number of people aged over 75 is set to double fromfive million now to 10 million in 2040 and the Dilnot Report estimates that three in four of them will need some form of long-term care. But a large number will have insufficient savings or assets to either contribute to the cost of their care or to take out commercial insurance products.

To help these people make some contribution to their own care needs, the International Longevity Centre has proposed the creation of a new savings product.

How personal care savings bonds would work

The new savings products would be similar in nature to premium bonds and would also be administered by NS&I. Like premium bonds, every £1 saved would be entered into a monthly prize draw but, unlike premium bonds, they would also attract a rate of interest to help them keep up with inflation.

Any money saved within PCSBs would be tax-free and excluded from the means test for long-term care costs but it would only be able to be used by the saver to pay for care related costs.

Any assets unused on the savers death would be passed on to their beneficiaries or used to pay funeral costs.

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